Apple’s margin squeeze has no easy fix amid 33% share drop

Apple Inc.’s profit margins are falling back to levels not seen since sales took off after the 2007 debut of the iPhone, as competition and lack of breakthrough products pressure the company to lower prices.

Concern over falling margins helped prompt a 33% decline in Apple shares from a record high of $705.07 on Sept. 21, making it the worst-performing stock in the Standard & Poor’s 500 Index in the same period. Last week, Apple said the board and management are discussing the return of more money to shareholders, after a proposal by Greenlight Capital Inc.’s David Einhorn to pay out more of its $137.1 billion in cash and securities, possibly with higher-yielding preferred stock.

The latest quarter’s drop in gross margin to 39% from 45% a year earlier was caused by the introduction of the iPad mini, other products with higher costs and price cuts for existing products, Apple said. Unless Chief Executive Officer Tim Cook unveils a revolutionary new gadget with premium pricing, Apple shares will remain under pressure.

“It will be almost impossible for Apple to maintain the margins it’s had in the last few years,” David Yoffie, a professor at Harvard Business School, said in an interview. “They’ve been able to charge pretty much whatever they wanted for their products, but competition is increasing.”

A central challenge is slowing sales of the iPhone, Apple’s best-selling and most-profitable product that accounts for 56% of revenue. Samsung Electronics Co., HTC Corp. and other rivals are introducing cheaper and feature-laden smartphones and tablets based on Google Inc.’s Android software.

Steve Dowling, a spokesman at Apple, declined to comment.

Margin Pressures

Apple rose 1% to $479.93 at the close in New York.

One product with the potential to be profitable enough to slow the margin slide could be an Apple-branded watch that also makes phone calls, accesses the Web and provides location-tracking services, said Poonam Goyal, an analyst at Bloomberg Industries. A watch with these features might retail for much less than $200, keeping it within the price range that is the fastest-growing portion of the time-piece market and also the most profitable, she said.

Apple could sell millions of the watches, and generate a margin of about 50%, she said. That’s about twice the margin Apple might earn by making a TV or selling an inexpensive phone for less-affluent shoppers, said Michael Morgan, an analyst at ABI Research.

The company is developing a wristwatch-like device using curved glass, the New York Times reported yesterday, citing unidentified people familiar with the situation. Natalie Kerris, an Apple spokeswoman, declined to comment on the plans.